A recent blog by Professor Jeff Sovern, occasioned by the recent Senate hearing on consumer arbitration clauses, recycles two of his favorite talking points: (1) consumers don’t understand arbitration clauses, and (2) consumers only benefit from post-dispute, not pre-dispute, arbitration. We’ve heard it all before, and our previous responses to his earlier iterations of those same arguments have stood the test of time.
Professor Sovern alludes to his 2014 study which concluded that consumers should not be bound by predispute arbitration clauses because they do not understand what they are agreeing to. However, as we demonstrated at the time, the study was riddled with serious flaws, including the fact that it did not include interviews with consumers who had actually participated in arbitration, it held arbitration clauses to higher standards than other contract terms, and it did not inquire into consumer understanding of class action litigation as compared to individual arbitration. We argued that these omissions were material because surveys by Ernst & Young and Harris Interactive had concluded that most consumers who actually participated in arbitration were satisfied with the process and an empirical study of consumer arbitration by the Northwestern University School of Law showed that arbitration was a faster, simpler, and cheaper way of resolving consumer disputes than going to court.
Subsequent studies of consumer arbitration—including the CFPB’s 728-page empirical Study issued in 2015 and more recent studies by the U.S. Chamber of Commerce—have confirmed that individual arbitration is far more beneficial for consumers than class action litigation. For example, the CFPB Study found that consumers who prevailed in an individual arbitration recovered an average of $5,389, and the entire arbitration process was concluded in an average of 2-7 months. By contrast, consumers who received cash payments in class action settlements got a paltry $32.35 on average after waiting for up to two years, while their lawyers recovered a staggering $424,495,451. In addition, most consumer arbitration clauses contain clear disclosures about what arbitration is and how it differs from court proceedings and give consumers the right to reject the arbitration clause without affecting any other terms of the contract.
We have also written extensively on the fallacies in Professor Sovern’s “opt-in” arguments. Among other things, once a dispute has arisen, one side or the other, or both, inevitably use the in terrorem “threat” of expensive and prolonged litigation as a negotiating tool. That tactic is eliminated if the parties have agreed to arbitrate the dispute prior to the dispute arising.
In sum, the testimony presented by Senator Toomey and Professor Zywicki at the Senate hearing was well founded and underscores the reality that consumers do have free choice in deciding whether to agree to arbitration.